UK: Cyber-Resilience—A Repeated Regulatory Message

An expectation that regulated financial services firms be
'cyber-resilient' should not cause any surprise.
Cyber-crime and data breaches represent major risks for business
generally. Comparatively, that risk is not mitigated by the
standards of British employees, who have been found to be
particularly ineffective at protecting their data and
devices.1 Accordingly, cyber-crime has the potential to
be profoundly destabilizing, as well as costly, to the UK financial
services sector.

However, the framework against which the expectation of
cyber-resilience translates into tangible and measurable
obligations is not substantially developed. Two recent FCA public
announcements provide some insight into the Regulator's
approach to cyber security, and indicate the direction and shape of
regulatory change. The FCA released its Business Plan for 2017/2018
on 18 April.2 The document sets out the FCA's
priorities. 'Technological change and resilience' is one of
six cross-sector priorities listed. The following week, on 24
April, the FCA's acting COO (Nausicaa Delfas) delivered a
speech at the Financial Information Security Network, titled
"Expect the Unexpected - cyber security - 2017 and
beyond".3 Ms. Delfas reviewed the landscape of
cybercrime risk, before proposing ways of managing it.

Unsurprisingly cyber security is a growing priority for the FCA,
and is therefore likely to be within the cross-hairs of its
Enforcement Division. Accordingly, although these public statements
do not represent rules or formal guidance, firms should ensure that
the principles espoused are carefully considered and, where
applicable, properly implemented. Below we have distilled five key
messages from the announcements.

1) Prevent, detect, recover, respond

Although historically the focus has been on prevention, the FCA
has emphasised that firms must address their capacity to detect,
recover and respond to any attack. Firms should have adequate and
appropriate systems which allow them to continue functioning in the
event of an unforeseen interruption. One key feature of a
firm's capacity to recover effectively concerns its back-up
strategy, the importance of which is underlined by the risk posed
by Ransomware. Ms. Delfas stated that the FCA expect firms to
maintain online and offline backups".4

Moreover, the Regulator expects firms to ensure that both
consumers and markets are, where appropriate, informed about
material breaches in timely fashion. An appropriate response is
likely to be delayed where firms have not formulated and
implemented, ahead of time, a clear strategy and chain of
responsibility.

The need for firms to defend and respond to cyber-attacks, and
do so quickly and effectively, is repeated in the FCA's
Business Plan.

2) Getting the basics right: the majority of crystalised
risk could be easily avoided

For all the apparent complexity of cyber-crime, several recent
studies have underscored a simple truth: most breaches would be
prevented by the adoption of basic measures. Ms. Delfas referenced
a 2016 data breach investigations report. The report detailed the
findings of a wide-ranging analysis of various data breaches and
security incidents, from across sixty-one countries. The report
found that ten vulnerabilities accounted for 85% of successful
breaches. Moreover, the majority of the vulnerabilities exploited
during attacks were well-known and easily fixed.

The FCA clearly believes that the report's findings are
reflective of the risks posed by UK financial services firms. On
that basis Ms. Delfas stressed the importance for firms to get the
basics right. She cited the statistic that, properly implemented,
the ten steps to cyber security, published by the National Cyber
Security Centre,5 would eliminate 80% of the cyber
threats which firms are struggling to manage. Furthermore, she
urges firms to carry out robust comprehensive risk assessments
focused on the impact of a Distributed Denial of Service (DDoS)
attacks on their system.

3) Third party oversight

One recurring theme in the FCA's Business Plan, reflective
of regulatory practice more generally, concerns the duty on firms
to monitor and oversee the risks faced by third party service
providers. By outsourcing its IT systems or processes a firm does
not necessarily escape regulatory responsibility for any resulting
failures attributed to cyber-attacks. This point was stressed by
Ms. Delfas in a previous speech made in September last
year.6 Firms are expected to perform appropriate and
adequate oversight of third party service providers. Similarly, the
Business Plan identifies issues associated with oversight and
control of increasingly complex chains of third party relationships
in the context of Fintech companies. Firms should be conscious that
Fintech companies may not properly understand the scope of
regulation or its impact on their business model.

4) Fostering a "secure" culture

The promotion and embedment of good regulatory culture in firms
has been an FCA focal area for some time. It will come as little
surprise that Ms. Delfas' speech echoed that expectation in the
context of cyber-security. The mere production and distribution of
a cyber-security policy may not meet the standards expected by the
Regulator. Firms must make continual efforts to promote and
strengthen good behavior amongst its staff. Ms. Delfas encouraged
firms to take staff "on a journey". She elaborated on
this concept in slightly less ambiguous terms, suggesting that
firms circulate fake phishing emails. Depending on their response
staff should be educated or rewarded accordingly. A good example of
this practice comes from the US Federal Government. Its Department
of Home Security is reported to have emailed its employees,
offering free tickets to an NFL match. Anyone who clicked on the
attached link was subject to a mandatory cyber-security
course.7

An obligation to foster good "culture" does however
present regulatory challenges. In her speech Ms. Delfas alluded to
the problem posed in measuring a firm's culture, which she
concedes is a "qualitative and intangible concept".
However, she articulated a mechanism for calibrating the culture of
a firm:

"by aggregating the
outcomes of ethical phishing exercises, red team tests, senior
leadership exercises, staff awareness events and information
security training, we can begin to gather baseline metrics against
which to track improvement. By tracking improvement, we can begin
to make tangible steps to improve our cultural attitude towards
security and start to tackle the more difficult challenges
emanating from within our organisations."

A failure to demonstrate marked improvements in these baseline
metrics—or simply an abject failure to meet acceptable
standards—could result in an enforcement action against the
firm.

Non-executive directors also have a responsibility to promote a
coherent and effective cyber culture. Ms. Delfas suggested that
NEDs, should satisfy themselves that their companies are managing
cyber risk effectively.

5) Information sharing

The FCA has seen a sharp increase in the number of cyber-attacks
reported to the FCA: from 5 in 2014, increasing to 89 last year.
Ms. Delfas rightly queries whether this surge can be attributed to
greater detection and reporting, rather than an increase in the
prevalence of attacks. Notwithstanding this trend, outside of
financial institutions which are considered of critical or systemic
importance, the FCA has noticed a lack of cyber information being
shared by firms. Information exchange in cyber-security will play a
major role in the FCA fulfilling it public functions in the future.
In recognition of this, the FCA has established several Cyber
Coordination Groups to better understand how threats differ across
the various sectors of the industry. Through information sharing
the FCA hopes to improve the resilience of the sectors it
regulates.

These comments are not merely an expression of encouragement,
but should be read as an articulation of firms' regulatory
obligations. Under Principle of Business 11 (PRIN 11) firms
"must deal with its regulators in an open and cooperative
way, and must disclose ...appropriately anything relating to the
firm of which that regulator would reasonably expect
notice." Public announcements like Ms. Delfas' speech
signal to firms that the FCA expects to be notified of cyber
information, even if it is not of direct significance to the
supervision of the firm itself. During her speech in September Ms.
Delfas commented, "I cannot emphasise enough how important
information sharing is to identifying and tackling patterns of
attack". Firms should assume therefore that attempted
cyber breaches—however efficiently they were detected or
responded to—may trigger a disclosure obligation.

Conclusion

Although not formal guidance, public announcements by the FCA,
in any form, signal the standards it expects firms, and their
managers, to meet when implementing cyber security. As such, these
announcements typically foreshadow the Regulator's enforcement
priorities. It may take some time before the FCA's expectations
are considered adequately developed and rehearsed to ground any
enforcement action. However, good practice and culture can take a
significant time to foster and embed. These announcements may
prompt firms to review their current procedures and test the
standards being applied by their employees.

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